04 October 2018
Episode one of our Belt & Road Initiative (BRI) series demonstrated that BRI is already seven times larger than the Marshall Plan. Episode two estimated how much steel will be required to execute the top 400 projects in our proprietary database. This episode focuses on the impact of BRI on a commodity which we do not hide our affection for – copper.
At the time of our last update, BRI included 68 countries or regions. Today, it has expanded to 115. They cover a vast area of Eurasia and parts of Africa, Latin America and Oceania. They house more than half the world’s population and comprise around one third of the global economy.
Our ongoing study of BRI is built upon a robust foundation – a detailed project database we manage on a continuous basis. It is from this sample we derive our spending figure of up to $US1.3 trillion in the first decade of the initiative1; and our associated bottom-up commodity demand estimates.
The result we have derived for copper is impressive. BRI projects could add up to an incremental 1.6 million tonnes of refined copper demand, equivalent to 7% of annual demand in 2017.2
BRI projects could add up to an incremental 1.6 million tonnes of refined copper demand, equivalent to 7% of annual demand in 2017.
And we suspect that it may only be the beginning.
Around 70 per cent of the new copper demand that have we identified comes from over 100 power projects.
Copper does not directly benefit as much as steel from the road, rail and other transport and logistics projects that represent around half of the total project outlay. However, the positive spillover effects of this infrastructure is expected to provide a wider field of economic opportunity in recipient countries for decades. Additionally, increasing the international competitiveness of manufacturing in these regions may create a major lift in future demand from copper intensive sectors such as automobiles, consumer durables and machinery.
Why might this be the case? The most important reason is that the end-use sectors for copper migrate as an economy moves through the various development stages. And while the precise blend varies by both level of development and national economic strategy, copper demand is always and everywhere diversified by sector.
This can be illustrated by choosing indicative low, middle and high income regions, and comparing the sources of their demand for copper.
In India today, copper end-use is diversified by major end-use sectors:
power - 14%
construction - 25%
consumer durables - 23%
transportation - 10%
machinery - 19%
In China today, the figures are:
power - 22%
construction - 26%
consumer durables - 23%
transportation - 8%
machinery - 14%
In North America, a wealthy, domestic demand oriented region, the figures are:
power - 13%
construction - 36%
consumer durables - 14%
transportation - 18%
machinery - 11%
In developed Asia, a wealthy, export oriented region, the figures are:
power - 15%
construction - 28%
consumer durables - 16%
transportation - 15%
machinery - 18%
This data illustrates that deriving 70 per cent of copper demand from power projects alone is not a ‘natural’ end-use footprint at any stage of economic development. No single sector accounts for more than 36 per cent of copper demand in the major regions detailed above. We anticipate that other copper using sectors will come to the fore once the fundamental blocks of enhanced electricity access and reliable cross-border and domestic logistics are put in place.
The 115 BRI countries and regions have an average copper consumption intensity of 1.35 kg per capita per annum, well below the world average of around 4 kgs.
The 115 BRI countries and regions have an average copper consumption intensity of 1.35 kg per capita per annum, well below the world average of around 4 kgs . Only 30 of the countries in the BRI have indigenous copper fabricating capability, and even then, 10 of those 30 are still net importers of copper cathode. This implies that much of the incremental direct and indirect demand for refined copper generated by the BRI will need to be met by an increase in cross-border trade. This will create opportunities for exporters around the world, although it is probably reasonable to conclude that China will benefit more than most, given its enormous footprint in the downstream copper value chain.
In our view, long run positions on the global copper market that do not explicitly reference BRI are incomplete.
While we highlight the impressive increase in the geographic coverage of BRI since we published episode two, it is important to acknowledge that not every signpost has been positive. Concerns about the ability of recipient regions to meet repayment obligations; questions pertaining to what might happen in the case of a default if a strategic asset is the nominal loan collateral; and rumblings about contract terms (especially where new governments have come to power with a mandate to revisit such matters) and even some project cancellations have emerged. The fact that many emerging markets are suffering from cyclical stress in their external financing positions has amplified some aspects of this debate.
Our general view is that foreign investment is a complex and risky business. Difficulties are to be expected in such an ambitious initiative covering so many jurisdictions where complexity and risk are higher than average. At the same time, there are signs that China is developing its institutional statecraft to improve its management of such challenges in the future; and the capacity of its firms to develop infrastructure at scale are beyond doubt.
[1] Our dataset runs to 2023, the decadal anniversary of BRI.
[2] As with all of our forecasts, this is one estimate within the range of plausible outcomes. We use Wood Mackenzie’s estimate of global refined copper demand in 2017 to calculate the 7 per cent.
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